I just saw the release. I called the company earlier and heard that they'd delay the reporting. Of course, I didn't get the detail that we see in the release. Sure enough, it looks like NM is writing off everything possible, I'm not pleased with the qualified opinion that NM will receive from their auditors. I believe they were in a similar situation 3 years ago.
However, considering NM is basically controlled by Safeguard, I suspect funding won't be a problem. Of course, this won't make a difference if NM is acquired, which I still believe is a virtual certainty. More on this later.
Several things I feel are worth mentioning:
A quick glance at NM's recent balance sheet's assets (12/96): prepaid show production and inventories increased from $28 million to $51 million, during the prior year. Also, the "excess of cost over net assets of acquired businesses and intangible assets" amount increased from $14 million to $54 million in the prior year, due mostly to the acquisition of PRTV. If these assets are worthless, which NM believes that they are, we should see at least $50 million in asset write-offs in Q4. Intangible assets are really worthless, with the exception of increasing book value and leveraging ability; hence the violation of the financial ratios.
It doesn't look like the secondary offering last year (otherwise known as the "beginning of the end"--with the help of hindsight, of course) had much of a lasting effect on the books.
It seems that NM's management was completely incompetent in evaluating and executing mergers, acquisitions, inventory management, asset valuation and accounting, media buying and production planning, etc., etc. In addition, NM only recently began to improve their website quantumtv.com , through which consumers can review their infomercial products and order by phone. I thought that this was an obvious move last year, with the increasing popularity of the Internet. Last year, NM even acquired an equity interest in Earthlink Network, which recently went public. But only now are they beginning to implement the Internet in their business plan. Their management completely lacked vision, and we shareholders have suffered because of their poor management.
Of course, most of this management team are now gone! The group of people that have replaced the displaced management are not industry experts, nor are they veterans of the infomercial business.
The apparent temporary nature of NM's top management and the influence and excellent business sense of Safeguard, combined with the low stock price, the consolidation in the consumer services/media industry, the growth of international economy and consumer interest in American products, and the increasing competition among leading companies in the industry (I mean the companies with cash flow, not NM) lead me to believe that now is the right time for NM to be acquired. But most of that is not news; I've said that before and we've seen no results yet. But the delay in the 10-K and PRE14-A or DEF14-A (proxy statements) suggest more than simply excessive accounting issues.
I quote from today's press release the last of the 8 actions that the company is taking:
"Continue discussions regarding potential strategic partnerships and other matters with several interested parties, through its ongoing financial advisory relationship with Lehman Brothers."
The "other matters..." part supports my belief that NM is currently in talks with "several interested parties" "through...Lehman Brothers." NM says a lot between the lines of this and the previous press release.
Of course, I may be fantisizing. But I think not.
Here's why:
The annual meeting will probably be held in August, since it's normally at the end of July, and the proxy statements have been delayed. I suspect that NM will want to have both positive Q1 results and some information about the "discussions" with these unnamed parties, lest the very unhappy shareholders express their displeasure with the board.
Also, if NM doesn't show the shareholders that it is making progress, these "interested parties" may contact the shareholders and offer to take control of the company. This could accompany a tender offer or a proxy battle, either of which could lead to an auction of the company. Obviously, that would be good for us shareholders, assuming the highest bidder offers a fair price.
So this 2 week delay may be a smokescreen for NM & Safeguard. If they were to file the 14A today, it may not include the wishes of the interested parties, and might provoke a hostile takeover attempt. By stalling, NM & Safeguard can hold discussions with each company and consider their terms. I am confident that Safeguard (owns at least 15%) will make sure that the shareholders get the maximum value for NM stock.
That said, I'd like to offer my final proposal for the likely acquiror. We've read about rumors mentioning Comcast (owns QVC), News Corp. (owns part of Guthy-Renker), HSN (owns Home Shopping Network), and CUC International. My vote goes to CUC International for several reasons. As a shareholder of CUC, I understand their business model and the value of National Media as an acquisition. I have suspected that CUC might be interested in buying NM since last summer, when NM was selling in the high-teens. But now I feel that the case for CUC is stronger than ever.
CUC is the world's largest direct marketer of consumer services. The company plans to merge with HFS (largest franchising company--Avis, Century 21, etc.) in the fall, creating a company with more than $20 billion market value and $5 billion in sales. CUC recently offered half a billion dollars in debt, to provide plenty of cash for acquisitions. They have loads of cash, and would not hesitate to issue stock in a merger. Needless to say, I believe CUC/HFS could outbid any other possible suitor.
CUC's CEO, Walter Forbes, is a brilliant business visionary, and buying NM would fit perfectly with his goals for CUC. CUC's objective is to "sell everything to everyone, anywhere." National Media has considerable exposure internationally, while less than 10% of CUC's sales are international. The synergies between the two businesses would be phenomenal.
CUC is currently (and will likely remain) the leading Internet marketer of services and products ( netmarket.com ). Most of CUC's sales come from annual membership fees. Members pay these fees in return for discounts for special services and a wide spectrum of products. CUC sells most of these services and products by catalog and phone. Catalogs can be costly, as can media time (as NM discovered), but NM's infrastructure (agreements with international TV broadcasting companies) is established and quite extensive.
By acquiring National Media, CUC would become the leader in the worldwide infomercial industry. Informercials are currently a more effective method of selling goods than the Internet, especially in international regions where TVs and phones are more common than PCs and modems. If CUC were to acquire NM, it would become the leading provider of services and products over the Internet, the television, and through direct mail catalogs. CUC would have access to nearly 1/3 of the world's population through these various media.
National Media could create infomercials detailing CUC's numerous membership programs, thereby significantly increasing the potential number of members CUC could gain. In addition, NM's former and present infomercial products could be sold throughout CUC's various channels, further driving product revenues. Additionally, CUC could broadcast infomercials in various languages over the Internet (once the bandwidth is fast enough), in addition to the television. I just thought of this idea, but I'm sure Forbes would think of it if CUC acquired NM.
Another tremendous opportunity for CUC is the acquisition of millions of new members through National Media's mailing list of customers. Imagine if CUC were to contact every person who ever bought a product from one of NM's programs. And if half of them paid $50 per year as a membership fee? That's a lot of money for CUC.
Once again, here are the reasons that CUC should buy NM:
1. Tremendous expansion of CUC's market penetration (especially international exposure) and distribution capabilities.
2. Acquisition of millions of names of NM's customers, each a potential CUC member.
3. Cross-marketing synergies, such as selling NM products through CUC's traditional distribution channels, and producing infomercials describing CUC's numerous membership offerings.
CUC has the goal to become the world's leading marketer and provider of consumer services and products. CUC has the financial ability to pay more than any other bidder, and CUC certainly is not afraid of paying a lot for an acquisition (They paid nearly 45x earnings for Sierra On-line and Davidson & Associates in 1996).
I believe that the benefits that National Media could provide CUC are worth at least a billion dollars. Of course, I don't expect CUC to offer $40 per share for NM, but $20 should be no problem.
That's all for now.
-Todd |
